ACCOUNTING FOR - Simpson Wreford

1 ACCOUNTING FOR RESIDENTS MANAGEMENT COMPANIES Chris Atkinson FCA Tel: 020 8666 0730 Tim Lindfield BAcc ACA Tel: 020 8666 0719 Nick Hunwick FCA Tel: 020 8681 5500 Alison Boram FCA Tel: 020 8681 5500 PR OPER T Y A C C OU NT A NT S Service charge specialists ACCOUNTING FOR RESIDENTS MANAGEMENT COMPANIES INTRODUCTION Is there a problem? The answer is .. possibly. The purpose of this briefing is to provide the reader with an understanding of the requirement to prepare accounts for Resident Management Companies (RMCs), the various options available, and some examples of the types of accounts which could be prepared. Given the size of the property market and the number of flats and houses which share common facilities it is perhaps surprising that there has not been a definitive set of instructions for the preparation of such accounts.

2 There is a mixture of Statute (Landlord & Tenant Act) and best practice (under the auspices of the Royal Institute of Chartered Surveyors RICS The Institute of Chartered Accountants in England & Wales ICAEW The Association of Residential Managing Agents ARMA). However discussion is still continues around several technical aspects of presentation, especially where the RMC itself is concerned. For example, should the company report any of the transactions which are shown in the Service Charge Statement of Account? It is argued that the RMC derives no economic benefit from the monies received which it holds on trust for tenants. This has not stopped the debate from continuing and the professional bodies are still seeking further guidance from learned counsel and other experts.

3 We have prepared this briefing on the basis of what we believe to be best practice, taking into account all the up to date guidance available at the present time. The reader s attention is drawn to the disclaimer below. Unless properly engaged to prepare the relevant accounts, we can accept no responsibility whatsoever to the casual reader. Simpson Wreford & PARTNERS OCTOBER 2012 DISCLAIMER. The information provided in this document for general information purposes only. We make no representations or warranties of any kind, express or implied about any of the contents, and any reliance so placed is made at the reader s own risk.

4 We will not be liable for any loss or damage (without limitation) indirect or consequential loss or other damage whatsoever in connection with the use of this information. ACCOUNTING for Residents Management Companies INDEX What are the issues? .. 1 Service Charge Accounts .. 3 Taxation of Service Charge Accounts .. 4 Statutory Accounts .. 5 Taxation of Statutory Accounts .. 6 Reporting by Independent Accountants .. 7 The role of a managing agent with accounts .. 8 Alternative reports Section 21 of Landlord & Tenant Act .. 9 Appendices: Notes to the appendices .. 10 Appendix 1 The eighteen month rule .. 11 Appendix 2 - Service charge accounts for ABC Court .. 12 Appendix 3 Statutory accounts for an inactive company ABC Man Co Ltd.

5 19 Appendix 4 - Statutory accounts selected pages of a company receiving ground rents RST Management Ltd .. 26 Appendix 5 Amenity Charge Accounts for CDE Court .. 36 1 RESIDENTS MANAGEMENT COMPANIES (RMCS) WHAT ARE THE ISSUES? ACCOUNTING for RMCs is a more complex than at first appears. The ACCOUNTING requirements will depend upon the type of development which has been built. The need for an RMC arises where properties (be they flats or houses) share common amenities which need to be maintained on a collaborative basis. Funds will need to be collected and expended on behalf of all property owners and as a limited company is the most practical vehicle to administer this it is used as one of the parties to the lease in the majority of cases.

6 Some estates are simple in concept, perhaps having a block of four flats. But some can include a complex mix of flats, houses, offices, even water features and communal facilities. Whatever the size the RMC through its directors (and managing agents where appointed) is the sole legal entity which can act on behalf of all parties. Leasehold Properties In the case of properties where the governing document is a lease, the parties will be the resident leaseholder, the freeholder and the RMC. The lease will set out all the various obligations regarding the property. In particular it will specify that SERVICE CHARGES will be due and payable to the RMC for the upkeep of the common amenities, the dates when payable, and the types of expenditure which the RMC is obliged to make in order to maintain them.

7 The lease may not specify the nature of accounts to be produced, but residents ARE ENTITLED under Section 21 of the Landlord & Tenant act of 1985 to request a summary of expenditure (A STATEMENT OF COSTS) from the RMC for the year. The lease may require that such a statement is reported on by an independent accountant and in some cases by audit. In each case, where an RMC has been formed, all of the necessary legal requirements must be dealt with, including, where appropriate, the Inland Revenue. The ACCOUNTING debate There has been considerable debate in recent years as to the nature of accounts to be produced. The service charges raised by the RMC are specifically for the maintenance of the leasehold properties.

8 It follows that these funds do not belong to the RMC (as would be the case in a conventional trading company), but are held ON TRUST for the individual leaseholders. The RMC derives no economic benefit from these funds. For this reason The ICAEW together with other leading accountancy bodies, RICS and ARMA have been developing a code of BEST PRACTICE in which it has been recommended that only those funds which belong to the RMC ( share capital) are shown in its accounts, and a separate Service Charge Account is prepared to account for all trust monies received and expended. This leaves the RMC itself with no activity to report. Our preferred description is inactive . There is presently some debate as to whether any of the service charge activity should be included in the RMC accounts but no final guidance has been issued.

9 Freehold Properties There are many instances where a group of freehold properties are built around common land by a developer who either retains that land or transfers it to the residents by way of a limited company. 2 In this sense it is still a type of RMC but the governing document will be a TP1 which is the purchasers contract to buy their property. This will stipulate that contributions (AMENITY CHARGES) will be made towards the upkeep of the common land. It is arguable that these contributions are also held on trust by the RMC. Indeed the constitution of the company will confine expenditure only to meet such liabilities. The RMC is maintaining the land on behalf of the freeholder, and surplus funds are held as a provision against future costs.

10 The situation is changed if the RMC owns the common land. In this case the asset belongs to the company and any monies received are to maintain its asset and therefore it will be entitled to retain surplus funds as reserves against future costs. The presentation in the respective accounts will be different in the above cases. Mixed Developments In some instances a development will be a mixture of leasehold and freehold properties, in which case both SERVICE CHARGES and AMENITY CHARGES will be accounted for. Add to this mix the possibility of the RMC owning some of the freehold land, and the question of presentation becomes important, as the reader will need to clearly see the individual sectors separately accounted for with a suitably clear statement of assets and liabilities.